Pricing in retail and e-commerce takes into account factors such as competitors’ actions, market conditions, consumer trends, and other variable costs. Companies must decide on a pricing strategy before marketing products to customers. In this article, we’ll look at five of the most commonly used approaches to retail pricing and decide which one suits your business needs.
1. Pricing with competition in mind
Competitive pricing uses competitors’ prices for similar products to determine the base price for their own products. Rather than focusing on production costs or the cost of the product, this pricing method relies heavily on market data.
Think of it this way. You have five competitors who sell the same product as you, and you rank them from the most expensive brands to the budget brands. Then you determine where your products are.
What is the ideal situation for using competitive pricing?
The reason why companies rely on competition-based pricing is simple. It’s easy, and you have complete control over your market position. Market intelligence gathered on competitors can provide more insight than just pricing, which you can apply to your store to get similar results.
The disadvantages are that it is difficult for companies to maintain competitive prices alone unless they actively add value to customers’ lives and recent mobile phone number data have quality products. Also, one of the main pitfalls is that selling solely on competitor prices can weaken your product and lead to loss of revenue.
Competitive pricing in retail is a very useful tool for retailers and small businesses, especially in e-commerce.
2. Cost-Based Pricing
Cost-plus pricing is a basic strategy that takes the total cost of producing a product and adds a desired markup to it. It is a good strategy in the long run. gambler data A business owner must first understand the costs associated with production: materials, labor, storage, equipment, utilities, etc. The markup added on top of the cost of production is the profit the company makes.
Here’s how cost-based pricing works:
- Step 1: Calculate the total cost of producing X units of product.
- Step 2: Divide the cost by X units to get the unit cost.
- Step 3: Multiply the unit cost by the markup percentage. If the unit cost is $10 and the markup percentage is 20, then the profit margin is $10 X 20/100 = $2. The price of the product is $12.
Ideal for retail companies. Depending on the product they offer, they can make different markups.
However, this approach is not entirely suitable how do social media aggregators function for software companies, music producers, etc., because the price of the product is much higher than its value.
3. Dynamic pricing in retail
The simplest way to describe dynamic pricing is that your price is not static, but instead changes based on other factors. These factors could be, for example, segments or time.
Dynamic pricing in segments
Companies use algorithms to calculate prices for different groups based on statistics.
Let’s say you have a car rental company, and your AI specializes in raising prices in places with lots of pubs and bars. If that sounds highly illegal and impractical, we can assure you that it’s not. We’re just describing Uber.
Dynamic Time Based Pricing
This type of pricing is often seen in sales-oriented businesses such as car or insurance dealerships where there is a rush to close deals at the end of the month. This is when dealers offer lower prices on items that meet their sales quota than they did at the beginning of the month.
In the real world, we see this all the time. Amazon , Uber, airlines—they all use dynamic pricing based on supply and demand.
You can read more about dynamic pricing in retail in the article – Dynamic pricing in retail: what to do and what not to do.
4. Penetration prices
Penetration pricing is a strategy used to capture market share by pricing products below market value to attract customers. Once a company gains significant market share, they adjust their prices accordingly.
Here’s How Penetration Pricing Works
Consider Company X, a small to medium-sized soap manufacturer, selling lavender soap bars for $10. International Company Y, which has much higher production capacity, enters the market and starts selling a similar lavender soap bar for $5. This is a clear example of a penetration pricing strategy.
Y’s goal here is to put small competitor X out of business, even if at $5 Y makes a very minimal profit, they are confident that X will not be able to match their prices. And when customers start buying from Y, X will eventually go bankrupt. This extreme form of penetrating pricing in retail is also often called predatory pricing.
The world famous Walmart has been doing this for decades and has become a big problem for small local retailers due to prices that are almost impossible to match.
5. Skimming pricing strategy
Setting a higher price for a product when it is newly launched, taking advantage of market demand, and then lowering or adjusting the price based on demand at a later stage is known as a “skimming” strategy.
We see this a lot with celebrity product launches or new product launches by a well-known brand. Early adopters are customers who are willing to pay a much higher price for a product, whether that price reflects the true value of the product or not, in order to get the product when demand is high, usually at launch.
The prices of these products are then reduced to attract more price-sensitive customers. Therefore, for each customer segment, the company takes the maximum amount, taking the top portion of these customer segments.
Whether it’s Rihanna’s Fenty Beauty, Kanye’s new clothing line, or the latest PlayStation, companies use “skimming” pricing to attract customers who not only pay for the product, but also want to be the first to use it. After a few months, the prices for these products usually drop.